Opinion
Hearing Granted by Supreme Court April 29, 1929
Appeal from Superior Court, San Diego County; Frank C. Collier, Judge.
Action by J.A. Isaacson, as trustee in bankruptcy of the estate of J.C. Rice, bankrupt, against the Union Trust Company of San Diego, the J.C. Rice Company, M.Y. Wolf, and others. Judgment for plaintiff, and the two last-named defendants appeal from the judgment, and from orders denying a new trial and motion to vacate the judgment. Affirmed.
Superseding opinion in 273 P. 119. COUNSEL
L.E. Dadmun, of Los Angeles, for appellants.
Curtis Hillyer, of San Francisco, for respondent.
Rolland C. Springer, of San Diego, for defendants.
OPINION
TUTTLE, Justice pro tem.
An opinion was filed by this court in the above-entitled cause on December 20, 1928. 273 P. 119. Thereafter the court set aside the decision referred to and the action was resubmitted upon the briefs on file therein.
This is an action brought by plaintiff, as trustee in bankruptcy of the estate of J.C. Rice, a bankrupt, to secure an adjudication of the ownership and title to certain property, and to establish the interest of plaintiff, as trustee, in the same, and for an accounting and recovery of money. Judgment went for plaintiff, and defendants J.C. Rice Company and M.Y. Wolf now appeal from the same, and also from the order denying motion for new trial, and the order denying the motion to vacate and set aside the judgment and render judgment in favor of defendants.
The complaint alleges that plaintiff is the trustee in bankruptcy of the estate of J.C. Rice, a bankrupt debtor; that at the time of the filing of the petition in bankruptcy said J.C. Rice was the owner of an undivided one-half interest in certain lands situate in the county of San Diego, known as the "Lincoln Acres"; that heretofore the said J.C. Rice, acting in the name of the defendant J.C. Rice Company, entered into an agreement with defendant Rae Investment Company, whereby said defendant and said Rice became owners in common of the tract of land hereinbefore described, taking the title thereto in the name of defendant Rae Investment Company; that subsequent thereto said Rice and said defendant Rae Investment Company entered into an agreement with said defendant R.E. Harrison Company, under and by virtue of the terms of which said R.E. Harrison Company became the selling agents for the defendants Rae Investment Company and the said J.C. Rice in the sale of said tracts of land hereinbefore described; that a large number of parcels of land have been sold, and the contracts for the purchase of the same have been placed with the defendant Union Trust Company for the purpose of collection; that the defendant Union Trust Company has collected a large amount of money upon said contracts, as plaintiff is informed and believes, one-half of which is the property of the said bankrupt; that the said R.E. Harrison Company has entered into said contracts under its own name, but in fact as and for the defendants Rae Investment Company and the said J.C. Rice; that the plaintiff is informed and believes, and on such information and belief alleges, that said J.C. Rice Company, a corporation, was organized by the said J.C. Rice as a vehicle through which to transact and conceal his assets from his creditors, and that ever since its organization said J.C. Rice has used said corporation for that purpose, and that ever since its organization said J.C. Rice has been and now is the sole owner of the said J.C. Rice Company and all of its assets, and that the said J.C. Rice Company is in fact and always has been J.C. Rice, the bankrupt debtor; that, prior to the commencement of this action, the said court of bankruptcy duly made and filed its order in said bankruptcy proceedings, authorizing and directing plaintiff to commence and prosecute this action.
On information and belief plaintiff alleges that said defendant M.Y. Wolf claims to own 247 shares of the capital stock of said J.C. Rice Company, being all of the capital stock of said company except 3 shares, and that the claim of the said M.Y. Wolf to said stock is without any right whatever, and that in truth and in fact the said J.C. Rice, the bankrupt debtor, was the owner of all of the capital stock of the said J.C. Rice Company at the time of the filing of his petition in bankruptcy.
At the trial of the action an amended complaint, to conform to the proof, was filed under order of court. The allegations of this amended complaint are similar to those in the original, except that certain other lands are added. The following additional allegations appear: That certain other parcels of real property stand on the records in the name of defendant J.C. Rice Company, but that they were, at the time the bankruptcy petition was filed, owned by said J.C. Rice; that on November 21, 1918, and at a time when J.C. Rice was insolvent, he was the owner of all the stock of the defendant J.C. Rice Company, to wit, 250 shares; that for the purpose of hindering, defrauding, and delaying his creditors he, J.C. Rice, executed and delivered to defendant Wolf a promissory note for $21,458.79, and as security therefor pretended to pledge to said Wolf 247 shares of said stock; that on September 9, 1919, said Wolf made a pretended sale of said stock to himself, and credited a payment of $15,000 on said note; that prior to said sale a creditor of said Rice levied an execution on said stock, and that said pretended sale was made to assist said Rice in concealing his assets from his creditors, and that said sale was made with the secret understanding that it was to be held in trust by said Wolf; and that said Wolf now holds the same in trust for plaintiff as trustee in bankruptcy.
Appellants each filed separate answers, which are practically the same. They deny the essential allegations of the complaint. In addition, the statute of limitations is pleaded. As the entire appeal revolves around the sale of said stock, we quote, in part, the finding of the court upon this issue:
"That on the 21st day of November, 1918, the said J.C. Rice was indebted to defendant M.Y. Wolf in the sum of $21,458.79, and that on said 21st day of November, 1918, the said J.C. Rice did, in consideration of said indebtedness, sign, execute, and deliver to said defendant M.Y. Wolf his certain promissory note for the sum of $21,458.79, payable to the order of defendant M.Y. Wolf, five years after its date, with interest thereon at the rate of 7 per cent. per annum, payable at maturity, and said J.C. Rice did at said time pledge and deliver to said M.Y. Wolf 247 shares of the capital stock of said J.C. Rice Company, and also stock in other companies; among the stock so pledged being stock of the Central Mortgage & Investment Company, as collateral security for the payment of said note. That said note so signed, executed, and delivered by said J.C. Rice to M.Y. Wolf, and delivery of the said 247 shares of the capital stock of said J.C. Rice Company and stock of the other corporations to said M.Y. Wolf, as security for the payment of said $21,458.79 note, was a bona fide transaction, and made in good faith on the part of said J.C. Rice and M.Y. Wolf, and for valuable consideration. That the value of said stock so pledged was fixed in said note by said J.C. Rice and said Wolf in said note at the sum of $75,000. That said alleged pledgee’s sale of said 247 shares of the stock of said J.C. Rice Company by the said M.Y. Wolf to himself on said 9th day of September, 1919, was made with the secret understanding and agreement between said J.C. Rice and said M.Y. Wolf that said M.Y. Wolf would hold said stock in trust for said J.C. Rice, and that said M.Y. Wolf does now hold said stock in trust for said plaintiff as trustee in bankruptcy of said J.C. Rice, and that the claim of said M.Y. Wolf to said stock of said J.C. Rice Company is without any right whatever as against this plaintiff."
The judgment does not mention the stock, but it is decreed that "plaintiff, as such trustee in bankruptcy, is the owner of said J.C. Rice Company, a corporation, and all its assets and property of every kind and nature."
It is contended that the statute of limitations (section 338, subd. 4, Code Civ.Proc.), which applies to relief upon the ground of fraud, bars any relief in respect to the pledge and sale of the stock. After a careful analysis of the pleadings, findings, and judgment, we have arrived at the conclusion that it is not necessary to pass upon the question of the statute of limitations. Appellants’ entire attack is centered upon the allegations with reference to the pledge and sale of said stock. As we view it, the complaint states but one cause of action, and that is to determine title to certain real and personal property. The allegations concerning the stock transaction are intended to be merely part of the said cause of action. The complaint does not ask any relief with reference to said stock. The judgment contains no adjudication upon that question. It is true the trial court finds the sale of the stock under the pledge to be void, but this finding is not translated into an adjudication, for the judgment is absolutely silent upon that point, nor can it, by implication or construction, be made to include this matter. As the judgment in this case now stands, defendant Wolf is the owner of said stock.
This is entirely in keeping with the contention of respondent, who does not attempt to argue that there are two causes of action, or that there is a separate cause of action relating to the stock transaction. The principal relief sought was to have certain property standing in the name of J.C. Rice Company, declared to be the property of J.C. Rice, the bankrupt. The judgment deprives the "dummy" corporation of all its assets and property, and declares the same to be the property of the bankrupt. This, we perceive, is the theory of the case as made out by plaintiff, and the one upon which the trial court proceeded, and we hold that theory of the case to be correct. As there was no cause of action based upon the fraudulent pledge or sale of the stock, and no adjudication in relation thereto, the contention of appellant in respect to the statute of limitations is without merit.
Appellants very earnestly object to the foregoing view of the case. The court cannot, they assert, deprive the corporation of all its assets and property, and thus render his stock worthless. We will turn our attention to this aspect of the case. Plaintiff, as trustee in bankruptcy for defendant J.C. Rice, is adjudged to be the owner of certain realty, some of which stood in the name of defendant J.C. Rice Company. It is also adjudged that such trustee is the owner of certain bonds in Prudential Mortgage Company, and that he is the "owner of said J.C. Rice Company, a corporation, and of all its assets and property." No mention is made of the stock in the judgment. The evidence shows without question, and the court found that "defendant J.C. Rice caused J.C. Rice Company to be incorporated as a vehicle through which to transact business and conceal his assets from, and to hinder, delay, and defraud his creditors, and ever since its organization said J.C. Rice has used said corporation for that purpose, and ever since its organization said J.C. Rice has been and now is the sole owner of the said J.C. Rice Company and all its assets, and that said J.C. Rice Company is in fact, and always has been, J.C. Rice, the bankrupt debtor, and that said J.C. Rice then used, and for a long time prior thereto had used, said corporation as a vehicle through which to transact business and conceal his assets from his creditors."
It has been repeatedly held that the courts, both at law and in equity, will disregard the fiction of corporate entity, when it is attempted to be used as a means to accomplish a fraud or an illegal act. 14 C.J. 61, par. 22, and numerous cases cited. The fiction in regard to a corporation being a legal entity will be disregarded, when attempted to be used as a means of defrauding creditors. 14 C.J. 61, note c, and cases; 1 Fletcher, Cyc.Corp. p. 62.
It further appears from the evidence that at all times defendant Wolf had knowledge of the facts found by the court as above quoted. It follows that, though defendant Wolf be the legal owner of the said stock, the court was justified and authorized to enter a judgment which declared all of the property and assets of the corporation to belong to plaintiff as trustee for the creditors. While this judgment may render the stock of defendant Wolf worthless, the record shows that he was associated with Rice in a number of the latter’s business ventures, and that he purchased the stock with full knowledge that the corporate entity of J.C. Rice Company was a mere fiction and vehicle for the perpetration of the fraud upon the creditors, and he cannot now be heard to complain. Nor will the fact that defendant Wolf acted in good faith when the stock was pledged aid him in retaining the assets of the corporation. The court further found, upon evidence which we hold to be sufficient, that the sale of the stock under the pledge was collusive, and made for the purpose of defrauding creditors.
Furthermore, defendant Wolf, when he purchased the stock, must be held to have assumed the risk of depreciation in the value thereof, on account of loss or deprivation of corporate assets. The sufficiency of the findings is attacked in many particulars. The "business" ventures of the bankrupt are spread over hundreds of pages of the transcript. His schedule of indebtedness was about $360,000. His assets were listed at $125, but claimed as exempt. At the time of the execution of said note to Wolf, his creditors were legion. Many of these were judgment creditors. Numerous corporations were organized by him, and the stock was traded back and forth. His gyrations in a corporate way are almost impossible to follow. Always, however, he was the whole corporation, the matter of control by a directorate being but a fiction. After the "sale" of said stock under the pledge, he continued just as he always did in the conduct of the corporation. The purported owner of the stock, for a period of some five years, shows by his testimony that he did not know what was going on, so far as the affairs of the corporation in which he held all the stock were concerned. We are satisfied that there is ample evidence in the record to support the findings.
A number of other objections are raised by appellants, but they all arise out of the pledge and sale of said stock. As we have pointed out, there is no adjudication of the title to said stock, and no injury was done to appellants in respect to the matters of which they complain.
The judgment of the trial court was eminently proper, and in keeping with the fundamental principles of justice and equity, and it is therefore affirmed.
We concur: FINCH, P.J.; PLUMMER, J.